Deal or no Deal!!!

“We are very encouraged with the progress that is being made,” Treasury Secretary Tim Geithner said in Paris Wednesday following a meeting with French President Nicolas Sarkozy.

The financial market’s aren’t so sure.

After rising at the open, major averages slipped into the red by 10:00 a.m. EST and the S&P was recently down more than 1%. In Europe, bourses sold off into the close as hopes dim for a “grand bargain” at the EU summit.

The immediate cause for concern were comments from an unnamed German official who played down hopes the European Financial Stability Facility (EFSF) would be combined with the permanent European Stability Mechanism (ESM). Combining the EFSF and the ESM would create a bailout fund with over $1 trillion in firepower, at least on paper, and the official’s comments dampened hopes for dramatic action from EU policymakers.

“As we approach tomorrow’s ECB meeting and Friday’s EU summit, at this point for markets in the short term it all comes down to whether the ECB prints or doesn’t print,” writes Peter Boockvar of Miller Tabak. Stepping back from the minute-by-minute headlines, the big concern is the European’s seeming inability to back up their rhetoric with concrete action.

“Their track record is not so good,” says Phillip Swagel, a University of Maryland professor and senior fellow at the Milken Institute. “The Germans and French come out with grand statements that they’re ready to address the issue…and then they don’t do it.”

Swagel, an Assistant Secretary of the Treasury during the Bush Administration, says the Europeans would be wise to take Sec. Geithner’s advice, but fears they won’t — or can’t.

“The problem is we don’t have a lot of influence,” he says. “The Germans and the French know what they need to do but politically it’s very difficult. German taxpayers in particular have to write a pretty big check to other countries” in order to save the eurozone.

For these and related reasons, Swagel is “skeptical” a deal gets done this week.

Given the optimism heading into this week, expect major market upheaval if he’s right and potentially something much, much worse. Hopefully the Europeans won’t take themselves – and the global economy – into another full-blown crisis, but the risks are rising.